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Top 12 Retirement PlanningMistakes To Avoid
Learn from other people’s mistakes andinvest with confidence
by Jane L. Doe
“An investmentin knowledgepays the best
interest.”
By: Pinyo Bhulipongsanon
Copyright© 2009 byInvestorGuide.com.
ALL RIGHTS RESERVED.
BenjaminFranklin
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Mistake #1: Saving For Retirement Without A Plan
Nowadays, people are living longer so retirees are spending 30 years or
more in retirement. It is important to plan ahead if you want to maintainyour standard of living during that time. Investing in tax-deferred savings
plans and other sources can help you get to a comfortable level for
retirement. But you can’t simply save and hope for the best, you need a
plan. Some important factors you might want to consider include:
• The age at which you plan to retire.
• Your retirement income needs.
• Your life expectancy. You can find this information from the U.S. Census
Bureau.
• Your current situation and the gap between what you have versus what
you need. Look at the current value of regular accounts, IRAs, and
company tax-deferred savings plans. Get an estimate of any company
pension plan, and your future Social Security benefits.
Once you have this information, you can determine what you need to dobetween now and retirement in order to achieve your retirement goal. This
can be done more easily with a retirement calculator, or better yet,
consulting a financial planner.
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Mistake #2: Not Starting As Soon As Possible
No matter how young or old you are, get started today. Due to the miracle
of compounding, starting a little earlier makes a big difference.
Consider the following (assuming a 10% annual return): Who do you think
would have more money in 40 years?
• Saver A contributes a fixed amount every year for the first 8 years and
then does nothing for 32 years, or
• Saver B does nothing for the first 8 years and then contributes that
same amount every year for the next 32 years
Believe it or not, the first
person would be ahead
at the end.
Get started today!
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Top 12 Retirement Planning Mistakes To Avoid
“Every youngman shouldhave a hobby;
learning how tohandle moneyis the best one.”
– Jack Hurley
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Mistake #3: Not Taking Enough Risk or Taking Too
Much
A common mistake many people make with their retirement investment planis not having the right level of risk with respect to their age, ability, needs,
and willingness to take risk.
In general, the further away your retirement is, the more risks you should
be willing to take in pursuit of higher returns. In general, this means
investing in stocks and stock mutual funds when retirement is far away, and
a mix of stocks and bonds as retirement approaches.
As part of the retirement planning process, your planner will estimate the
average annual rate of return your savings and investments must earn to
help meet your spending requirements and other goals. Then, an optimal
portfolio of investments will be crafted that takes the lowest level of risk
necessary to earn that potential return.
Chances are, that portfolio will include a healthy dose of stocks for growth
potential and to help protect your purchasing power. The fact is, even
retirees need equity exposure to outpace inflation.
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Top 12 Retirement Planning Mistakes To Avoid
Tips:• Be Honest About Your
Risk Tolerance
•
Invest in Stocks WhileYoung; Bonds WhileOlder
• Investor Risk and the 5Ways to Evaluate It
More tips on InvestorWords.com
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Mistake #4: Not Saving On A Regular Basis
Little by little is the best way to achieve big goals such as retirement. For
most people, retirement savings is a long-term endeavor, and the mostpractical way to achieve your this is to start early and contribute regularly to
your savings.
It is a mistake is to saving “whenever you can,” and not making regular
savings a priority. This is one reason why 401(k) plan is a good tool to save
for retirement. Depending on your company’s plan administrator, the whole
process of contributing to your 401(k) plan, investing in funds, and
rebalancing your asset could be automated.
Also, when you start savings for retirement, make it a point to keep saving
at the same cadence, and increasing your contributions each year. Don’t
make the mistake of saving for a few years, then stop.
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Top 12 Retirement Planning Mistakes To Avoid
Tip:Avoid the habit of contributing to yourretirement fund only if
there happens to be anycash left over at month-end. Without fail, set asidea specific amount eachmonth for retirement beforepaying other bills.
Saving even a smallamount regularly is much
easier than trying to save itall at once.
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Mistake #5: Not Taking Full Advantage of Retirement
Vehicles
There are many retirement vehicles to choose from and you should learnabout the advantages and disadvantages of each, and how they could be
used in combination with your non-retirement investments to maximize
performance.
Some of the major retirement vehicles include:
• 401(k) – Allows you to invest tax-deferred by applying your
contributions as tax deduction and let you pay taxes upon withdrawal.
Major benefits include easy regular contributions via payroll deductions
and potential company matching contribution.
• Traditional IRA – Allows you to make tax-deferred investments by
applying your contributions as tax deduction.
• Roth IRA – Allows you to invest after-tax dollars and your investment
grows tax-free.
Be sure to take full advantage of all the options available to you.
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Mistake #6: Not Seeking Out Professional Help
When was the last time you had a professional financial planner review your
retirement plan and investments? I am willing to bet that most of you wouldsay NEVER. Yet we are talking about the most important part of your
finances, and possibly the largest savings that you have today.
The funny thing is that most people are less willing to take this type of risk
with other aspects of their lives. For example, they hire professional home
inspectors and appraisers when buying a house. They go to their doctor’s
office at the first sign of a problem. They hire plumbers and electricians
when they encounter problems. Why not hire a professional financialplanner to help you with your retirement plan and investments?
In general, it is a good idea to work with a fee-based CERTIFIED FINANCIAL
PLANNERTM who can help review your investments and provide advice. When
choosing your advisor, be sure to steer clear of "advisors" who act like
salespeople and pitch financial products based on commissions.
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Top 12 Retirement Planning Mistakes To Avoid
Tips:• Questions to Ask and
Criteria to Use WhenEvaluating a Money
Manager
• Common Mistakes ThatPeople Make WhilePicking a FinancialAdvisor
• Finding an Advisor
More tips on InvestorWords.com
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Mistake #7: Poor Asset Allocation and Diversification
For most investors, proper asset allocation and diversification is the best way
to grow and protect your investments. The best examples are Harvard andYale, who are very-well known for having the most successful endowments
today. Let’s look at Harvard asset allocation and diversification strategy :
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Top 12 Retirement Planning Mistakes To Avoid
Tip:Always keep a diversifiedportfolio, regardless of current market conditions.
If everything you own ismoving in the samedirection, at the same rate,your portfolio is probablynot well diversified, and youcould stand to reconsideryour asset allocationchoices.
Do you notice the
difference between
Harvard’s and your
investment portfolio?
My guess is that your
portfolio is not nearly as
well-diversified as you
think.
Note: 2010 planned endowment
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Mistake #8: Cashing Out of Borrowing Against Your
Retirement Accounts
What is the fastest way to kill your retirement savings? The answer is simple– cash it out and use it today. Remember what you spend today won’t be
there for you to use during your retirement.
Your retirement savings are not meant for your short-term needs. When you
cash out your retirement savings before qualified retirement age, you have
to pay 10% early withdrawal penalty. If you are withdrawing from tax-
deferred accounts such 401(k) or Traditional IRA, you also have to pay taxes
at your current income tax rates. This typically wipe sout 30-40% of yourwithdrawal before you can even get to your money.
The lesser evil of the two is to borrow against your 401(k). Aside from not
letting your money grow, you’ll most likely stop contributing to your
retirement savings while you are repaying your loan. If your company
provides matching contributions, you are giving up free money as well.
Finally, if you lose your job or quit, you have to pay back the loan in full or
risk paying the early withdrawal penalty and taxes.
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Top 12 Retirement Planning Mistakes To Avoid
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Mistake #9: Relying Too Heavily On Social Security Or
Company Pension
Social Security and company pensions are just part of your overallretirement plan. For many people, these income sources are insufficient to
maintain their desired standard of living. Not to mention that our Social
Security system has been under stress for many years. This means that it
could or could not be there when you need the money, or the benefits could
be reduced.
Moreover, your company could go bankrupt and put your pension benefit
under distress. Although the federal government’s Pension Benefit GuarantyCorporation helps protect your interest, there is a maximum limit that may
be lower than what you would otherwise get. Additionally, there are many
rules and exceptions that could reduce your payout.
A strong retirement plan includes income from Social Security and pensions,
but does not rely on them as the primary sources of income.
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Top 12 Retirement Planning Mistakes To Avoid
Tips:• Maximizing Social
Security Benefits
•
Early Social SecurityBenefits and Long LifeSpans
• Studying Up on SocialSecurity
More tips on InvestorWords.com
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Mistake #10: Investing Too Much In Your Company
Stock
Investing in your company stock is possibly one of the worst offense againstdiversification. Talking about putting all your eggs in one basket. Let’s
assume half of your 401(k) value is tied to your company stock. What would
happen if your company goes belly up? Essentially, you lose your job and
half or your 401(k) savings at the same time!
You may think this could not possibly happen to you. Just ask ex-employees
of Lehman Brothers, MCI WorldCom, and Enron – just to name a few.
Unless you have an undying faith in your company, or just like to take
unnecessary risks, it is best to avoid your company stock altogether.
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Top 12 Retirement Planning Mistakes To Avoid
“Loyalty ispowerful. Butwhen it comes
to investing,loyalty shouldhave its limits,especially whenit comes toinvesting in the
stock of thecompany thatyou work for.”
– Anonymous
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Mistake #11: Investing In Expensive Or Hot
Investments
Investment expense is about the only variable that you can control when it
comes to investing. And due to compounding, these expenses can really eat
away your gains and leave you with lackluster performance. Here are some
ways to you can reduce your expenses:
• Avoid mutual funds with sales load and redemption fee
• Avoid mutual funds with high expenses and turnover ratio
• Avoid frequent trading – i.e., buys and sells
Another type of expense to avoid is chasing performance. Whatever you do,
please do not invest your portfolio in the hot funds or hot stocks. Hot
investments are those which have done well in the most recent time frames,
unfortunately, this is by far the easiest way to lose money in the market.
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Mistake #12: Not Investing During Retirement
Some people falsely believe that all the hard work is done once they retire.
Unfortunately, that is simply wrong. Just because you retire doesn’t mean
you stop planning for retirement.
With today’s longer life expectancy, you could be spending 25-30 years in
retirement and it is more important than ever to make sure that your
retirement savings last. This means you have to keep and eye on your
investments and spending.
Here are some things to keep in mind:
• You should maintain a conservative withdrawal plan with 25-30 years in
mind.
• You should avoid overly conservative investments early in retirement –
specifically, don’t shift all of your investments into fixed-income. You still
need some stocks and stock mutual funds to stay ahead of inflation.
• Review and update your retirement plan regularly.
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Top 12 Retirement Planning Mistakes To Avoid
“How you investduringretirement is as
critical as howyou invest inpreparing forretirement.”
– Daniel R. Solin
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